2014 (3) TMI 1162 - HC - Income Tax

Computer software as clubbed with computers as the depreciable asset @60% - HELD THAT - Both the CIT (Appeals) and the Tribunal found that the software cannot be seen in isolation and delinked from the computer. The reasons that are assigned is that what has been always understood as obvious is now apparent by the amendment. CIT(Appeals) found that in the case of the present assessee the software cannot be worked in isolation. It has to be loaded on the computer. Therefore in the present case it is an intergral part of the computer. In these circumstances the finding of fact does not require any interference in our appellate jurisdiction as the same does not raise any substantial question of law. Exemption u/s 10A - income generated from training given to the customer for the use of the software - HELD THAT - There is a finding of fact that the training activity is incidental to the sale made by the assessee company in respect of the products manufactured. Unless the users are trained further sales are going to be affected. This receipt is therefore closely related to the manufacturing activity carried out by the assessee. In these circumstances and when the findings of fact have been confirmed by the Income Tax Appellate Tribunal but for some different reasons that we are of the opinion that this Appeal does not give rise to any substantial question of law. Therefore we are of the opinion that the income generated from training given to the customer for the use of the software in this case was eligible for exemption under section 10A. TP Adjustment - computation of Arm s Length Price along with the price in relation to international transactions entered into by the assessee with it s subsidiaries as commission has been paid on customisation fees - argument was that the assessee has subsidiaries which act as a sale and marketing office of the assessee. The nature of the transaction is essentially of re-sale - HELD THAT - The ultimate sale prices are negotiated by the subsidiaries directly with the end-customers and assessee s offers are negotiated. Therefore when there are subsidiaries but local independent distribution agents to whom a commission has been given then the ultimate margin offered and paid to the subsidiaries is only 10%. In other words there has not been found to be a variation of such nature as would enable the Assessing Officer to question the payment. In such circumstances the finding of fact which has been rendered cannot be said to be vitiated by any perversity or any error of law apparent on the face of record. The reasons assigned by the Tribunal in paragraph no.18 of the order are based essentially on the nature of the dealings. Once the subsidiaries are found to be collecting the customization work and which work was not being done by independent distributors then the justification has been rightly accepted. No substantial question of law

Summary

Issues:
1. Depreciation rate for computer software
2. Treatment of income from training activity in relation to software export
3. Arm's Length Price computation and commission payment in international transactions

Depreciation Rate for Computer Software:
The appellant argued that the software should not be considered part of the computer for depreciation purposes and should be eligible for a higher rate. However, the court found that the software is an integral part of the computer and cannot be delinked from it, as clarified by an amendment to the Income Tax Rules. The Commissioner and Tribunal both agreed that software cannot be seen in isolation and must be loaded onto the computer, making it a part of the computer. Consequently, the court held that this issue does not raise any substantial question of law.

Treatment of Income from Training Activity:
The appellant contested the inclusion of income from training activity in export turnover for deduction under section 10A of the Income Tax Act. The court noted that training users after software delivery is essential for further sales and is closely related to the manufacturing activity. The Income Tax Appellate Tribunal confirmed this finding, stating that the training income was eligible for exemption under section 10A. As a result, the court determined that this issue did not give rise to any substantial question of law.

Arm's Length Price Computation and Commission Payment:
Regarding the computation of Arm's Length Price and commission payment in international transactions, the court examined the nature of dealings between the assessee and its subsidiaries. The court found that the commission paid on customization fees resulted in an upward adjustment to the assessee's income. It was argued that the subsidiaries acted as sales and marketing offices, negotiating ultimate sale prices directly with end-customers. The court upheld the findings of the Commissioner and Tribunal, stating that the payment to subsidiaries was justified based on the nature of transactions. The court concluded that this issue did not present a substantial question of law, leading to the dismissal of the appeal.